The African Continental Free Trade Area

05 Sep 2018

Africa

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The African Continental Free Trade Area – a symbolic step, but still a long way to go

The heads of state of 44 of 55 African Union (AU) member states in March 2018 signed the African Continental Free Trade Area (AfCFTA) during an extraordinary summit in Kigali (Rwanda). The AfCFTA marks a significant step towards continent-wide integration.

A step in the right direction

The AfCFTA is part of the AU’s ‘Agenda 2063’, which sets out the organisation’s vision for unity in the coming decade. The AfCFTA hopes to double intra-African trade, which currently accounts for 16% of overall trade, by removing non-tariff and tariff barriers on a wide range of goods and services. The free trade area would ensure mutual recognition of standards, licensing and dispute mechanisms for key industries, making it easier for African companies to leverage economies of scale in new markets.

A second phase of negotiations is already under way to define an additional common framework to the AfCFTA for investment, dispute resolution, intellectual property rights and competition policy. However, the AfCFTA itself will now need to be ratified domestically by each signatory country and will not enter into force until at least 22 countries have completed this process. Ratification is likely to be finalised in the next two years, but could prompt intense internal political debates in some countries.

Big beasts slow progress

Even if ratification proceeds smoothly, implementation is likely to be challenging. Lack of political will by some countries could slow the process. Initially, neither South Africa nor Nigeria – some of the continent’s key economic players – signed the agreement. Nigeria’s President Muhammadu Buhari did not even attend the summit in Kigali, arguing that the AfCFTA would undermine Nigeria’s growing manufacturing industry and workers across different sectors. However, Buhari’s administration has come under increasingly vocal pressure from local businesses and international investors to ratify the AfCFTA, prompting him to announce on 11 July that his country would soon sign up. Nigeria’s ratification of the AfCFTA would increase the agreement’s impact and encourage other African countries to ratify it in the coming months. South African President Cyril Ramaphosa, who attended the summit in Kigali, initially requested more time to consider technical aspects of the agreement – specifically its implications for the country’s steel and aluminium sectors. Nonetheless, South Africa has now signed given that larger groups in its manufacturing, food retail and banking sectors stand to gain from the agreement’s provisions.

Day-to-day constraints

Day-to-day operational constraints common to a range of African markets will also pose key challenges to implementation of the AfCFTA. Strong tendencies towards protectionist policies in many countries are likely to affect the extent to which free trade is actually practised, even if an agreement is reached in principle. Such policies have typically included import restrictions on seasonal products to protect local producers and industries, periodic export restrictions in cases of food shortages, and subsidies by national governments for local industries.

Inefficient bureaucracy and poor infrastructure are likely to pose a major challenge to the implementation of a continent-wide free trade agreement. Poor transport links and infrastructural deficits in low-income countries continue to pose significant hurdles to intra-regional trade, which would likely be mirrored on a continental scale. Meanwhile, uneven or fragmented power and water supplies, as well as inefficient ICT structures and cumbersome cross-border customs processes across African countries, will continue to hamper efforts to deepen international trade flows.

Impact for international investors

If the AfCFTA is implemented successfully, the newly formed free trade area would unlock a regional market of 1.2 billion people with a combined GDP of USD 3.4 trillion for international investors. This would enable significant new market entry opportunities, and with the AfCFTA’s harmonising of regulations and tariff removals across the continent, would also create an enabling business environment for them across a number of economic sector such as transport, tourism, telecoms, agriculture, services and manufacturing. Likely improvements to investors’ day-to-day operations include the removal of tariff and non-tariff barrier, greater access to finance, and lowers transportation costs.

Long-term prospects

If adequately implemented and supplemented with stronger protections against predatory pricing in the coming years, the AfCFTA would boost trade, increase industrialisation and attract foreign investment. This would in turn work to enhance national plans to boost trade, diversification and industrial value-addition laid down by several African states in recent years, as they have sought to move away from commodity dependency, encourage domestic production and create more employment opportunities for young people.